Before you decide to convert a 401k, 403b or TSP from your previous employer or any Traditional IRA's you might have to a ROTH...stop and consider a few things. This is not a "no-brainer" for most investors.
Read Ric Edelman's downloadable report entitled "the ROTH Conversion Conundrum" from his website at: http://www.ricedelman.com/ (you have to provide your name and e-mail addres to get it but it is worth it).
For example,
(1) If you have children near college age, the conversion will increase your reportable income on the FAFSA form for college aid and may require additional hoops to go through to explain the unusual income spike (not in the Ric Edelman report but yet another consideration)
(2) If you are older, and maybe near retirement or in retirement, then that conversion increases your income and with the 2-year delay may increase your premiums for Medicare which are income-based (this is in the report by Ric)
(3) Do not assume that you will be in a higher tax bracket when you are ready to withdraw this IRA money. For starters, today, income tax brackets are indexed to inflation so for a married couple almost $20,000 of income is not taxed. With 3.5% inflation, in 20 years that amount may be nearer to $40,000. If, in retirement, you only had to withdraw $40,000 per year from your Traditional IRA or 401k or 403b or TSP, then that amount would come out tax-free anyway.
The answer to the question of whether to convert depends on:
(1) Your age
(2) Years to retirement and actually needing the money
(3) Whether you can pay the taxes on the conversion from other funds (but remember that you must calculate the future value of what those funds used to pay taxes could grow to also)
(4) Whether you plan to use the money or allow it to remain as an inheritance for your heirs
(5) Your tax bracket now and in the future (don't assume it will be higher)
This is one of the value-added propositions of good financial planners who are not selling you products or assets under management and can and will be independent and objective.
The $100,000 income limit to convert has been removed as of January 1, 2010 and it is not scheduled to return so there is plenty of time to consider your alternatives. The option to pay the tax over a 2-year period, however, only exists for 2010 conversions but that still does not mean you should do this in one lump-sum now.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.